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The national taxpayer advocate, Nina Olson, in her annual
report to Congress for 2011, cited the IRS’ lack of adequate
funding, expanding workload and overreliance on automation as the most
serious problems facing taxpayers. She said that, as a result, the IRS
cannot adequately meet the needs of taxpayers, cannot adequately
detect and address noncompliance and cannot maximize revenue collection.

In her report, she said that the IRS relies too heavily on
automation in making changes to taxpayers’ returns, assuming that
information from third parties is correct and making changes based on
this information without conducting an examination, which would allow
taxpayers to invoke rights that normally accrue in an examination.
Olson noted that, frequently, it is later established that the
taxpayer was, in fact, correct, but the taxpayer often then has
difficulty getting the corrections made because the IRS’ understaffing
makes it hard to reach the Service by phone or to get a timely written
response.

Olson also objected to the IRS’ increased reliance on math error
authority, which is an authorization by Congress to correct errors on
returns without using the deficiency procedures. Olson added that the
notices the IRS sends in math error cases are often incomprehensible
and leave taxpayers uncertain of what the IRS is correcting. They are
often used inappropriately as well. As an example of the misuse of
math error corrections, Olson cited an instance where the IRS
improperly used the authority to deny refunds for the first-time
homebuyer credit based on third-party information that the taxpayers
purchased their houses before the effective date of the credit. (For
more on IRS math error correction problems, see “TIGTA: IRS Does Not
Timely Resolve Math Error Disputes,” Aug. 24, 2011.)

Another area of concern is the IRS’ use of automation in identifying
and flagging what it deems to be fraudulent returns or refund claims,
especially in the area of fraudulent wage withholding. Olson notes
that the freezes the IRS places on refunds last too long and are
exacerbated by delays in receiving matching wage withholding
information. In some cases, the IRS “auto-voided” returns that were
deemed fraudulent without giving taxpayers any notice; in a number of
cases, these returns were later found to be legitimate. She also noted
that the IRS’ attempt to deal with the large increase in fraudulent
earned income tax refund claims filed by prison inmates by matching
the refund information with state prison records increased the risk
that people who had been released from prison would mistakenly show up
on those records and be denied a legitimate claim.

Among the other issues Olson addressed was the need for a codified
taxpayers’ bill of rights because most taxpayers had no idea they had
any rights when dealing with the IRS. Olson also mentioned the
deleterious effect of tax liens on taxpayer compliance. Finally, in
discussing the most serious problems facing the IRS, Olson mentioned,
in the area of international taxation, that the IRS’ focus on
“stepped-up enforcement without adequate coordination and a
corresponding increase in service” was ill-serving international
taxpayers, a criticism of the IRS’ controversial overseas voluntary
disclosure program, which Olson has strongly criticized elsewhere and
which she elaborated upon in the report.

What do accounting firms waiting on others to develop AI, automation, and data analytics tools have in common with a baseball fan sitting in a stadium filling with water at an exponential rate? The answer could determine your firm’s fate.